Monday, September 20, 2010

Appraisers and Fee Splitting with AMCs.

I just sent the letter below via snail mail to Sandra Braunstein, who is working with others in her department of the Federal Reserve Board considering the portion of the Dodd/Frank Financial Reform Legislation dealing with home appraisal fees. We'll see if I get any response and/or if any response I receive will be anything other than a form letter.

For non-appraisers looking this over, this likely makes little sense and, doubtless is of little concern to you. However, if anyone who reads this happens to be an appraiser, or is in some manner connected to the mortgage lending industry - including any working for appraisal management companies - I'd appreciate it if you would read this through and make any comments - pro or con - which you may have. Especially let me know if you disagree or find any egregious errors in my letter. I won't mind hearing from you if you agree either. :)

Also, I would encourage other appraisers to send letters off to Ms. Braunstein in the hope of strengthening our position as regards AMC fee splitting. I think it's well past the time when we should stop being given the shaft by AMCs. Note that I obtained Ms. Braunstein's name and mailing address from the latest on-line edition of Working RE.

I am writing this regarding the consideration currently being given to the portion of the Dodd/Frank Financial Reform Legislation concerning residential appraisal fees and the bill's language which indicates that those fees should be "customary and reasonable."

I agree with TAVMA (Title/Appraisal Vendor Management Association) that the language is vague. However, Appraisal Management Companies or AMCs are standing in opposition to any regulation or directives concerning appraisal fees.

First, a bit of history: AMCs are a relatively new phenomenon. They first appeared either in the late 1970s or sometime in the 1980s. They developed in response to changes in the mortgage lending industry - mainly its movement away from generally local and locally owned banks and other mortgage lenders to regional and national institutions. As it stands today, there are few local lending institutions. As this movement increased, it became less desirable for lenders to maintain local offices and staff and contacts with local appraisers. During the past 25 years or so, it gradually became more common for lenders to seek the services of AMCs from which to order appraisals. That, in and of itself, is fine.

However, in the early years, the change to AMCs was slow. Old habits die hard. It was often a hard sell. The chief problem was, of course, cost. Lenders did not want to pay any more for an appraisal ordered through an AMC than if they had contacted the appraiser directly. "No problem," said the AMCs. "We’ll simply take our portion out of the appraisal fees you are currently paying."

Observing this formula AMCs generally made contact with primarily younger or more accurately, less experienced appraisers who were perhaps having difficulty establishing a clientele. Many such appraisers were willing (if not happy) to accept lower fees in order to obtain work. More established appraisers were outraged at this. Fees for residential appraisals had developed over many years and were, for the most part, reflective of the time and expertise required to properly and professionally complete assignments. The lower fees being paid by AMCs were rightly seen as a threat to an appraiser's ability to be competitive, to continue to do professional quality work, and frankly, to make a living. This has been an ongoing fight within the appraisal industry for years.

The advent of the HVCC (the Home Valuation Code of Conduct) originally negotiated between Fannie Mae and the State of New York and then adopted nationwide, effectively mandated that lenders could no longer have direct contact with appraisers which then had the consequent effect of opening the flood gates for AMCs. When the HVCC officially went into effect in May of 2009, many appraisers literally lost all of their clientele overnight. They were left to scramble about, searching for and signing on with AMCs in the hope of getting work. Many gave it up and left the business entirely. There are today, fewer licensed or certified residential appraisers nationwide than at any time since the early days of nationally mandated licensing in the early 1990s.

What it comes down to is what constitutes "customary and reasonable" fees? Obviously, the AMCs want that figure to reflect what they generally pay appraisers for their work. The question then is: Why should the appraiser be expected to take less for the same work ordered by AMCs than he or she was normally receiving directly from lenders?

The services provided by AMCs do nothing to enhance the appraiser's condition. The AMCs would argue that they provide a major work source. That is a strawman argument as, if AMCs did not exist, lenders would still require appraisals. The work would still be there.

The fact is that ALL of the benefits of services provided by AMCs accrue to the lender. Lenders using AMCs, both before and since the HVCC, were and are provided the convenience of using just one or perhaps two or three AMCs as sources for most or all of their appraisal needs rather than maintaining long lists of appraisers across the country. As time passed, the AMCs developed reviewing capabilities which had the effect of reducing the work load for lenders. They could either eliminate staff and/or redirect their efforts in other, perhaps more profitable, endeavors. Again, all of these and other services which AMCs provide benefit only the lender. Why then should the appraiser be expected to pay for these services out of his or her fee?

It should be noted that some AMCs often receive as much as 60% or more of the total fee collected from the lender for an appraisal leaving what is often far less than half of the fee for the appraiser - the individual who actually performs the work.

It is my opinion, and one that is, I believe, shared by many in the industry, that if lenders elect to use AMCs (and it is still technically an election, not a mandate) that any monies paid to AMCs should be a separate fee, not connected to the appraisal itself. It is the appraiser who performs the inspection, who performs the research, who completes the report, and who is primarily liable for its conclusions. The lender should pay for services received. The days of "fee splitting" should end.

I understand in your capacity your primary concern is rightly for consumers, with what is best for them, and perhaps, what is best for the housing and mortgage lending industry as a whole. I also understand that appraisal fees are of little concern to the average mortgagor except insofar as they are obligated to pay them. But, there are other considerations.

Recent surveys conducted by various appraisal organizations and publications, of which I expect you are aware, have found that many appraisers feel that quality and reliability of appraisals have declined since the implementation of the HVCC. This decline is largely owing to lower fees with AMCs often awarding assignments to the lowest bidder, coupled with pressures on appraisers brought to bear by AMCs for quick turn-arounds of reports. Completed reports are considered due often as little as 24 hours after the inspection which doesn't allow for careful consideration of assignments. Well considered and accurate appraisals are vital to the current and future health of the mortgage and housing industries. A bit of justice regarding appraisal fees could be a small, but not insignificant step toward that goal.

"Nothing in the world can take the place of persistence. Talent will not; nothing is more common than unsuccessful men with talent. Genius will not; unrewarded genius is almost a proverb. Education alone will not; the world is full of educated derelicts. Persistence and determination alone are omnipotent." - Calvin Coolidge

Thought For The Day

I'm not thorough. I'm just slow.

Food for Thought

Sometimes yes, maybe no. Sometimes no, maybe yes.

Thought For a Green Day.

"Being Irish, he had an abiding sense of tragedy, which sustained him through temporary periods of joy." -- William Butler Yeats

About Me

I am a charter member of the Boomer generation having been born in 1946. My fellow Boomers and I have lived through some incredible events - good and bad. Now my wife Jo and I are "empty nesters" faced with aging and all that comes with it. My two kids are out and about pursuing their lives. My wife and I continue to adjust to life in the slow lane.